Financial Analysis. 3 rd Edition. Steven M. Bragg

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1 Financial Analysis 3 rd Edition Steven M. Bragg

2 Chapter 1 Overview of Financial Analysis... 1 Learning Objectives... 1 Introduction... 1 The Purpose of Financial Analysis... 1 Key Financial Analysis Concepts... 2 Judgment in Financial Analysis... 3 Precision of Financial Analysis... 3 Death by a Thousand Cuts... 4 Monitoring Analysis... 4 Role of the Financial Analyst... 5 A Conservative Bias... 6 Summary... 6 Review Questions... 7 Review Answers... 8 Chapter 2 The Financial Statements... 9 Learning Objectives... 9 Introduction... 9 The Income Statement... 9 Income Statement Overview... 9 The Single-Step Income Statement The Multi-Step Income Statement The Contribution Margin Income Statement The Multi-Period Income Statement The Balance Sheet Overview of the Balance Sheet The Comparative Balance Sheet The Statement of Cash Flows Overview of the Statement of Cash Flows The Direct Method The Indirect Method The Statement of Retained Earnings Overview of the Statement of Retained Earnings Financial Statement Disclosures Summary Review Questions Review Answers Chapter 3 Accounting Issues Impacting the Financials Learning Objectives Introduction The Basis of Accounting Accrual Basis of Accounting Cash Basis of Accounting Modified Cash Basis of Accounting Effect of the Fiscal Year Recordation of Revenue at Gross or Net Bill and Hold Revenue Negative Cash Inventory Costing Methods Depreciation Methods Current Value Accounting Illusory Profits Financial Statement Reporting Issues i

3 Headline Earnings Pro Forma Earnings Window Dressing Auditor Certification Summary Review Questions Review Answers Chapter 4 Interpretation of Financial Statements Learning Objectives Introduction Interpretation of Financial Statements Horizontal Analysis Vertical Analysis Cash Coverage Ratio Current Ratio Quick Ratio Liquidity Index Accounts Payable Turnover Ratio Accounts Receivable Turnover Ratio Inventory Turnover Ratio Fixed Asset Turnover Ratio Sales to Working Capital Ratio Debt to Equity Ratio Fixed Charge Coverage Breakeven Point Gross Profit Ratio Net Profit Ratio Return on Net Assets EBITDA NOPAT Limitations of Ratio Analysis Summary Review Questions Review Answers Chapter 5 Cost-Volume-Profit Analysis Learning Objectives Introduction Contribution Margin Breakeven Point Margin of Safety Cost-Volume-Profit Analysis Sales Mix Summary Review Questions Review Answers Chapter 6 Pricing Decisions Learning Objectives Introduction Psychological Pricing Cost Plus Pricing Dynamic Pricing Freemium Pricing High-Low Pricing Premium Pricing ii

4 Time and Materials Pricing Value Based Pricing Other Pricing Strategies When to Review Pricing Price Elasticity of Demand Cross Price Elasticity of Demand Non-Price Determinants of Demand Summary Review Questions Review Answers Chapter 7 Cost Object Analysis Learning Objectives Introduction Factors in Cost Object Analysis The Assignability of Costs The Customer Cost Object Customer Acquisition Costs Customer Lifetime Value The Employee Cost Object The Product Cost Object The Product Line Cost Object The Sales Channel Cost Object Cost Object Termination Issues Which Cost Objects to Track Summary Review Questions Review Answers Chapter 8 Constraint Analysis Learning Objectives Introduction Constraint Analysis Operational Terminology Overview of Constraint Analysis The Cost of the Bottleneck Local Optimization Constraint Analysis Financial Terminology Constraint Analysis from a Financial Perspective The Constraint Analysis Model The Decision to Sell at a Lower Price The Decision to Outsource Production The Capital Investment Decision The Decision to Cancel a Product Summary Review Questions Review Answers Chapter 9 Credit Decisions Learning Objectives Introduction The Credit Rating Internal Credit Rating Systems Third Party Credit Ratings Evaluating Credit Scores Use of Credit Ratings Credit Rating Errors Indicators of Future Payment Delinquency iii

5 Ongoing Credit Monitoring Actions Requests for Credit Increases The Riskiest Customers The Demanding Customer Effects of Industry Credit Practices Summary Review Questions Review Answers Chapter 10 Financing Choices Learning Objectives Introduction Overview of Debt Funding The Line of Credit The Borrowing Base Early Payment Discounting Invoice Discounting Factoring Inventory Financing Purchase Order Financing Leases The Long-Term Loan Bonds Agency Financing Deleveraging Overview of Equity Funding Restricted Stock Unrestricted Stock Warrants Angel Investors and Venture Capital Crowdfunding Private Investment in Public Equity Debt for Equity Swaps Summary Review Questions Review Answers Chapter 11 Financial Leverage Learning Objectives Introduction The Financial Leverage Concept Issues Impacting Leverage Leverage Risk Impact of Compensation on Leverage Summary Review Questions Review Answers Chapter 12 Capital Structure Analysis Learning Objectives Introduction Optimal Capital Structure Capital Structure Analysis Line of Credit Issues Tax Shield Effects Future Financing Flexibility Loan Covenant Issues iv

6 Maturity Structure of Debt Creditor Position Considerations Debt Paydown Cost of Capital Reduction Planning for a Bond Rating Capital Structure Measurements Interest Coverage Ratio Debt Service Coverage Ratio Recapitalization Timing of Changes to the Capital Structure Summary Review Questions Review Answers Chapter 13 Dividend Analysis Learning Objectives Introduction The Investor Viewpoint The Company Viewpoint The Stock Buyback Option The Stock Dividend Summary Review Questions Review Answers Chapter 14 Foreign Exchange Risk Analysis Learning Objectives Introduction Foreign Exchange Risk Overview Foreign Exchange Risk Management Take No Action Avoid Risk Shift Risk Time Compression Payment Leading and Lagging Build Reserves Maintain Local Reserves Hedging Types of Foreign Exchange Hedges Loan Denominated in a Foreign Currency The Forward Contract The Futures Contract The Currency Option The Cylinder Option Swaps Netting Summary Review Questions Review Answers Chapter 15 Interest Rate Risk Analysis Learning Objectives Introduction Interest Risk Overview Interest Rate Risk Management Take No Action Avoid Risk v

7 Asset and Liability Matching Hedging Types of Interest Rate Hedges The Forward Rate Agreement The Futures Contract The Interest Rate Swap Interest Rate Options Interest Rate Swaptions Summary Review Questions Review Answers Chapter 16 Financial Forecasting Learning Objectives Introduction The Differences between a Budget and a Forecast The Run Rate Concept Sensitivity Analysis Revenue Forecasting The System of Budgets The Number of Budget Scenarios The Rolling Forecast The Cash Forecast The Short-Term Cash Forecast The Medium-Term Cash Forecast The Long-Term Cash Forecast The Use of Averages The Use of Clearing Dates in a Forecast Summary Review Questions Review Answers Chapter 17 Managing the Rate of Growth Learning Objectives Introduction The Funding of Growth Contribution Margins and Sustainable Growth Organic Growth Step Costs and Sales Growth Other Constraints on Growth Negative Effects of Excessive Growth The Ideal Rate of Growth Summary Review Questions Review Answers Chapter 18 The Cost of Capital Learning Objectives Introduction Cost of Capital Derivation Cost of Debt Cost of Preferred Stock Cost of Common Stock Weighted Average Cost of Capital Variations in the Cost of Capital Adjustments to the Cost of Capital Cost of Capital as a Threshold Value vi

8 Summary Review Questions Review Answers Chapter 19 Discounted Cash Flow Techniques Learning Objectives Introduction Time Value of Money Present and Future Value Tables Net Present Value Internal Rate of Return Incremental Internal Rate of Return Terminal Value Inclusions in Cash Flow Analysis Summary Review Questions Review Answers Chapter 20 Capital Budgeting Learning Objectives Introduction Overview of Capital Budgeting The Capital Request Form The Payback Method Real Options Capital Budget Proposal Analysis Complex Systems Analysis Research and Development Funding Analysis The Outsourcing Decision The Post Installation Review Summary Review Questions Review Answers Chapter 21 The Lease or Buy Decision Learning Objectives Introduction The Lease Arrangement The Lease or Buy Decision Leasing Concerns Leasing Advantages Summary Review Questions Review Answers Chapter 22 Acquisition Valuation Learning Objectives Introduction Liquidation Value Real Estate Value Relief-from-Royalty Method Book Value Enterprise Value Multiples Analysis Discounted Cash Flows Post Five-Year Cash Flows Negotiation of DCF Contents vii

9 Replication Value Comparison Analysis The Comparison of Sales Multiples The Comparison of Cash Flows The Comparison of Contract Revenues Week High Influencer Price Point The Initial Public Offering Valuation The Strategic Purchase Intellectual Property Valuation Extraneous Valuation Factors The Control Premium The Earnout Synergy Analysis The Valuation Floor and Ceiling Summary Review Questions Review Answers Chapter 23 The Enhancement of Shareholder Value Learning Objectives Introduction Return on Equity Economic Value Added Cash Flow Analysis Opportunity Cost of Capital Key Success Factors Stock Price Enhancement Long-Term and Short-Term Value Considerations The Industry Setting Summary Review Questions Review Answers Glossary Index viii

Financial Analysis. 2 nd Edition. Steven M. Bragg

Financial Analysis. 2 nd Edition. Steven M. Bragg Financial Analysis 2 nd Edition Steven M. Bragg Chapter 1 Overview of Financial Analysis... 1 Learning Objectives... 1 Introduction... 1 The Purpose of Financial Analysis... 1 Key Financial Analysis Concepts...